S&P: CSM Bakery Solutions LLC 'B' Rating Affirmed, Outlook Revised To Negative On Operational Stumbles Following SAP Roll-Out
At the same time, we affirmed our ratings on the company's $850 million first-lien term loan due 2020 and the company's $210 million senior secured second-lien term loan due 2021 at 'B+' and 'CCC+', respectively. The '2' recovery rating on the first-lien term loan indicates our expectation for substantial (70% to 90%, lower half of the range) recovery in the event of a payment default. The '6' recovery rating on the second-lien term loan indicates our expectations for negligible (0% to 10%) recovery in the event of a payment default.
Adjusted debt for the 12 months ended June 30, 2016, was $1.3 billion.
"Our ratings affirmation reflects our expectation that CSM's financial metrics will improve in 2017 as the company laps the one-time costs it incurred in 2016," said S&P Global Ratings credit analyst Amanda O'Neill.
The company recently incurred €55 million of costs related to enterprise software (SAP) implementation and could not fill orders on time due to system issues, leading to a loss of business in the U. S. as customers sought supplies from competitors. Case fill rates are at historical levels and order fill rates are returning to historical levels (albeit slowly) and the company has won back some of the business it lost; however, full recovery will take time as customers work through current commitments or short-term contracts they entered into with competing suppliers. Regaining lost customers will be a top priority for management over the next 12 months and customers that have already come back have done so for quality of product. Debt to EBITDA for the 12 months ended June 30, 2016, was about 14x (compared to 7.5x for the prior-year period). We include the one-time costs related to the company's SAP implementation and restructuring costs in our calculation of EBITDA; if we excluded these items from EBITDA, debt to EBITDA would be below 8x.
The negative outlook reflects the likelihood that S&P Global Ratings could lower the ratings over the next few quarters if the company does not regain the customers it lost or continues to experience SAP implementation issues and lose customers, resulting in lower than expected EBITDA and leverage above 8x by fiscal year-end 2016. The negative outlook also reflects our view that liquidity could become pressured during the next 12 months if the company has to borrow more on its ABL to fund additional restructuring, given our expectation of negative to break-even cash flow in 2016 and possibly 2017.
We would revise the outlook to stable during the next 12 months if the company improves profitability by regaining customers and no longer experiences operational missteps with its roll-out of SAP in North America, leading to financial leverage sustained below 8x.